NB Private Equity Partners (LON:NBPE) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because private equity (PE) is not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece ‘2023 CMD: value creation from growing companies’, what can you tell us about it?
A2: We reviewed NB Private Equity Partners’ differentiated strategy, strong outperformance and good market positioning in our initiation, ‘Co-investments generating superior performance’, and ‘1H’23 results summary: continued growth’.
The key theme running through their 5th October capital markets day was the superior EBITDA growth of its investee companies. Across the NB co-investment platform, in 2006, EBITDA growth was expected to produce 63% of total value creation, but it has risen to 93% in recent deals. Critically, target IRRs (20%+ net) are unchanged as higher-interest-rate impacts are offset by PE manager actions to grow EBITDA.
As PE managers, or GPs, look for greater equity support, the NB platform’s co-investment pipeline has seen more opportunities, despite the slower PE market activity.
Q3: What was your single key takeaway from NBPE’s recent capital markets day?
A3: For us, it was all about EBITDA and earnings growth. The factors behind the historical outperformance in growth were outlined and, critically, going forward the levers available to the company’s partner managers to grow EBITDA in order to offset higher interest costs. The latter is especially important as we see that as a key investor concern with the whole PE market at the moment.
So, looking at what their co-investing GPs can do, they have more opportunities to do bolt-on deals at attractive prices, and 70% of the top 30 holdings have done M&A during NBPE’s period of ownership.
Secondly, many of their investee companies have pricing power and so can pass on inflationary cost increases, and inflation is a key driver to a higher rates environment. This is because many provide mission-critical services, often enhance their customer efficiency and have market disruptive models in sectors with secular growth.
The bottom line, and this is key, is that target returns on recent deals have been the same as, or even marginally higher than, ones considered five years ago, but the way they will be achieved has changed.
Q4: In previous interviews, you have discussed the attractions of the PE market as a whole. What is it about the co-investment sub-sector that makes it an especially attractive area?
A4: With co-investments, an investor like NBPE does not pay the General Partners’ (GPs’) fees, but it still generates the gross PE return. This lower-cost model delivers superior long-term returns.
Being focused on co-investments means they have complete control over the pacing of new investments, which is also good for cashflow and liquidity management. There are no long-tail commitments and, in some cases, the potential for earlier realisations.
There is no blind-pool risk as investments are made directly into known companies. The company has control over diversification and the investment process, and finally, investments are subject to the double due diligence of NBPE and the manager.
Q5: What about the risk?
A5: Sentiment to costs, the cycle, residual positions in highly rated listed companies following IPOs in 2020-21, the duration of the discount and valuation are the key issues for NB Private Equity Partners, as they are across the whole listed sector. As we detail in our report, in our view, they are sentiment issues, and do not reflect reality, as we see it. The benefits from the current strategy may not yet be fully appreciated.